This dissertation consists of three independent research projects aimed at gaining a better
understanding of the economics of organizations. The unifying theme of the dissertation is
the protection of knowledge in a hierarchy structure. This runs through all three chapters.
In the first chapter, I develop a theoretical model that incorporates different communication
costs into a knowledge hierarchy structure. The model shows that, for a knowledge hierarchy
to be optimal while containing middle managers, it must be that middle managers are
better at communicating with the owner than are the workers beneath them in the hierarchy.
The middle managers must also be relatively adept at communicating with the workers, otherwise
a two-tier hierarchy is optimal where they are the workers in the hierarchy.
The second chapter, co-authored with Michael Sanders, examines the formation of knowledge
hierarchies in a laboratory experiment. We use a simplified version of the model in
Garicano and Rossi-Hansberg (2006a) to see if participants respond to changes in communication
costs. We find that participants do respond to incentives but there is a strong
preference for togetherness. Moreover, participants are strongly discouraged from trying to
join groups if they have been (exogenously) rejected in the past, suggesting that disappointment
is a factor in their deciding whether or not to join a hierarchy.
In the final chapter, I develop another theoretical model which incorporates on-the-job-effort
into a knowledge hierarchy structure. This model shows that workers exert less effort in a
hierarchy than they would if they were self-employed and, the more layers there are in the
hierarchy, the less effort they exert. However, middle managers exert more effort than they
would if they were self-employed or if they were the workers in a two-tier hierarchy.